I am a securities law attorney at Wiand Guerra King in Tampa, Florida, where my practice includes complex commercial litigation and regulatory matters, with a focus on securities and financial services litigation. I am also part of the team representing the court-appointed receiver of Arthur Nadel's $400 million Ponzi scheme, and have particular expertise in the area of Ponzi schemes. In addition to my law degree, I also hold a Masters in Business Administration from the University of Miami. In my spare time, I also publish the Ponzitracker blog, which tracks the proliferation of Ponzi schemes both nationally and internationally. Feel free to follow on Twitter at @Ponzitracker. All opinions expressed are solely that of the Author. This blog is not intended, nor should it be construed, as legal advice.

Feds Halt Alleged $600 Million ZeekRewards Ponzi Scheme: How It Happened And What's Next

On Friday, August 17, 2012, the Securities and Exchange Commission (“SEC”) filed an emergency action in a North Carolina federal court, alleging that ZeekRewards and its founder, Paul R. Burks, were involved in one of

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the largest Ponzi schemes in history. The move came as many began to question the legality of the operation and whether its promised 1.5% daily returns were simply ‘too good to be true.’ These fears were confirmed on Friday, with the unavailability of Zeek’s website and the closure of its Lexington, N.C. headquarters serving as an ominous sign leading up to the SEC’s announcement Friday evening that it had halted the scheme as it teetered on the “verge of collapse”. The sheer number of victims, which authorities estimate tops 1 million, likely earns Zeek the infamous distinction as the largest Ponzi scheme in history by the number of investors, and will add a layer of complexity never seen before in trying to unravel the scheme and distribute funds to investors. For sake of comparison,the number of investors in Bernard Madoff’s $65 billion Ponzi scheme, the largest in history by investor losses, was “only” in the thousands.

According to authorities, Zeek consisted of two related operations, Zeek Rewards and Zeekler. Zeekler was an international penny auction website that offered users the ability to win merchandise by placing one-cent “bids”. Zeek Rewards was the investment arm of the operation, offering users the ability to share in up to 50% of daily “profits” by completing a daily set of tasks that included soliciting new customers and selling or giving away “bids” to new users. At the end of the day, users were paid “Profit Points” usually totaling 1.5% of their investment, and were given the choice either to receive their “profits” in cash or rollover the points to compound future returns. Many chose to re-invest, and due to the compounding nature of the Profit Points and the steady stream of new customers, authorities allege that the number of outstanding Profit Points was nearly 3 billion at the time the scheme was halted. The scheme depended on investors choosing to reinvest their profits, for according to the SEC, Zeek would have been insolvent in a matter of weeks, if not days, had investors chosen to receive their profits in cash.

No doubt in efforts to avoid the scrutiny of federal and state authorities, Zeek made it mandatory for new users to acknowledge that they “are NOT purchasing stock or any other form of ‘investment’ or equity” before becoming a member. While Zeek dubbed the operation as an “e-commerce subscription”, the SEC disagreed, charging that, in reality, the company was engaging in the fraudulent offering of unregistered securities.

In its announcement, the SEC also stated that Paul Burks, Zeek’s founder, was cooperating with authorities and had agreed to pay a $4 million civil penalty and relinquish all interests and assets in the company – all without admitting or denying any culpability. Burks cooperation should be seen as a positive sign for investors, as his knowledge of the scheme will significantly help authorities unravel the operation and account for all assets. According to the SEC, Zeek has paid over $375 million to investors to date, and currently holds approximately $225 million in investor funds in financial institutions all over the world. These funds were frozen in an emergency asset freeze granted by the North Carolina federal court, meaning that they cannot be dissipated or misappropriated during the course of the investigation.

Zeek and its affiliates have attracted scrutiny in recent weeks as investors increasingly began to doubt the operation’s legitimacy. According to David Dalrymple, President of the Winston Salem Better Business Bureau (“BBB”), the BBB had been receiving complaints for some time, and within the last 30 days alone had received 30,000 inquiries about Zeek. Said Dalrymple, “In twelve years as the President here, I cannot compare that to any level of inquiry for any other business. Ever.” Dalrymple stated that the BBB’s analysis of Zeek had raised many red flags, and that it immediately notified criminal authorities.

While investor losses pale in comparison to those experienced by Madoff or Stanford investors, the sheer number of Zeek investors is on a magnitude that has never been dealt with before in a receivership or bankruptcy context. To illustrate, assuming Zeek had one million investors, a simple 1-page summary for each investor summarizing contributions and withdrawals, stacked together, would be 101.3 meters high, or roughly 300 feet. The staggering number of victims suggests that investigation of the fraud and establishment of a distribution process will likely be a drawn-out process involving hundreds, if not thousands, of people.

Going forward, the first step will be the appointment of a receiver by the North Carolina federal court. In an Order filed late Friday, United States District Judge Graham Mullen appointed Kenneth Bell as the temporary receiver, empowering him to take control of Zeek’s assets and begin an investigation. Mr. Bell is a Partner at the Charlotte office of McGuireWoods, where his practice includes white collar crime. It is likely that Bell took control of Zeek’s offices yesterday immediately after the Order was signed. In the Order, Judge Mullen also ordered Burks to provide a list of all assets, employees, and creditors of Zeek to the Receiver within 10 days, and a full accounting of assets, bank accounts, and other property within 30 days.

For now, the North Carolina Attorney General has established a hotline for concerned investors at (919) 716-6046.

(08/20) EDIT – Forbes has confirmed that Burks is being represented by Noell Tin of Tin Fulton Walker & Owen, a Charlotte, NC law firm.

(08/21) EDIT – The Receiver has announced the establishment of a Receivership website at www.zeekrewardsreceivership.com. Victims wishing to communicate with the Receiver should email info@zeekrewardsreceivership.com.

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I have recently become involved with a receiver and I can truthfully say that the only one who will profit from the appointment of this receiver in the Zeekler case is the receiver. My experience is that the receiver will eat up as much of the Zeekler money as possible and the affiliates will get nothing back. If the affiliates were fine with the Zeekler operations, why should the SEC stick their nose into it. Nobody forced anybody to become an affiliate. I would rather if the SEC had not “protected” me from this “fraud” and allowed Zeekler to continue. Since Zeekler has been shut down I have begun to see ads on TV for several other penny auction websites that are using normal, conventional channels for their advertising. I’m sure they will do well now that Zeekler has been knocked out of the marketplace!

While I can’t comment on your direct experience with a receiver, I can point you in the direction of the ASD receiver, and the positive experiences of those that followed the proscribed path to claim and recover their funds – all of those filing a claim were reimbursed in full. Don’t quote me, but I believe this was more than 11,000 people.

Just curious – was it another online program which led to your personal experience, and can I ask which one?

Since the receiver, Kenneth Bell, is the only person/firm with legal standing to discuss any refunds in the (distant) future, has he or his firm, McGuire Woods, issued a statement? I did search, and can’t find anything new.

For all of you who still believe that Paul was railroaded into signing a guilty plea deal, and Zeek Rewards/Zeekler was this legitimate company, ask yourselves this:

If Paul was indeed innocent, then why did he plead guilty and agree to pay a fine of $4 Million Dollars? He could have retained the best criminal attorney for the $4 Million and fought this in court to prove his innocence.

Now ask yourself this, if you had $4 Million Dollars and was accused of a crime you didn’t commit, would you agree to plead guilty and pay a fine of $4 Million Dollars, or would you fight it?

In the SEC case, Paul did not plead guilty, but instead agreed to settle the SEC’s charges against him without admitting or denying the allegations.

The point being if he was truly innocent and Zeek was not a Ponzi, then why would he agree to settle the SEC charges against him? If he had not agreed, the the SEC would have filed charges against him and there would have been a jury trial. If Paul had won this civil case, it would mean that Zeek could return to business as usual.

So the question still is if you were innocent, would you pay a $4 Million Dollar fine and consent to the charges without admitting or denying the allegations?, or

Would you hire the best attorney and go to court and prove you were doing nothing illegal and Zeek was a legal company?

As we get 30,000 signatures on tax rises blocking and audit and investigation follows other channels. 25,000 signatures have arrived And I have news of the 8 cases opened (allegations) are resolved and 7 … so do not let anyone nervous that we are in good hands.

Hi all

I guess many of you have known the news for which a U.S. judge had launched an investigation of Zeek Rewards.

The news is confusing and we hope to know something more in the coming hours. We do not know if the page has been closed court or the company has decided to close it while the investigation is being conducted.

I found a link by which they are collecting signatures to send them directly to the state prosecutor to reopen the company if closed or at least to see the support he has.